In the eye of the beholder - what is really driving your investment decisions?

It was the audition for the final key role to be cast for the movie Thelma and Louise. The part of charismatic drifter and thief, J.D. With the role narrowed down to four actors, it was left to director Ridley Scott, the casting director Louis DiGiaimo, and actress Geena Davis to audition the final four.

The first three through the door were George Clooney, Grant Show and Mark Ruffalo. Geena Davis came to remember them as the brunettes. All talented, handsome, and perfect for the role. Davis said she couldn’t split them. Then the final one to audition walked in. The blonde one, as Davis recounted in her memoir “Dying of Politeness”. She recalled the actor as being “stunningly gorgeous”, so much so, that despite having the script in front of her she was so distracted that she kept flubbing her lines when reading with him.

The actor was Brad Pitt, and despite Davis constantly messing up the audition by being distracted by his looks and charisma, Pitt got the part.

Years later Davis was seated next to George Clooney on a long-haul flight between Europe and the US. Clooney joked with her he really wanted the role and was disappointed he lost out to Pitt. Davis played along with Clooney, but she didn’t remember him from the audition until he told her he was one of the three brunettes.

It’s hard to deny being beautiful or handsome plays a role in how we view someone, even to the point where seeing Brad Pitt makes you forget George Clooney! Humans are visual and our eyes make quick studies of people in every situation we find ourselves in. That will cross the spectrum of whether we choose to have our guard up for protection or drop our guard down allowing ourselves to be charmed. Appearance initially determines how we react to someone. This starts young, even babies react more positively to attractive faces.

Jokes aside, this bias toward attractiveness has often led to suggestions that the good looking among us enjoy a more favourable path through life. Teachers give more attention to better looking students and more favourable grades. Doors open, there are better job opportunities, increased compensation etc. Such beliefs have all been studied and confirmed. This inevitably raises the question: how are investors influenced by attractiveness?

We no longer need to wonder because there’s been a study done on it.

“What Beauty Brings? Managers’ Attractiveness and Fund Performance” is a study by Chengyu Bai and Shiwen Tian. It’s still in draft form, but makes for interesting (or humorous) reading, regardless. The study was conducted in China where mutual fund managers are required to have their ID photos available on fintech platforms for investors to view. The researchers obtained the managers’ ID photos and plugged them into a deep learning AI model which assessed them for their attractiveness.

Attractiveness was established by using the results of a prior human based study on attractiveness. These results were then used to train a deep learning model so it would replicate the grading established by the humans. After this, all the mutual funds were sorted monthly on their managers’ attractiveness score.

How did the beautiful people do? Not great it would seem. Those who were categorised as being the most attractive fund managers performed worse than those who were categorised as the least attractive fund managers. The difference was over 2% pa. This accounted for risk and other variables such as fund age, fund size, and flows.

Why did they underperform? According to the report’s authors, it can be attributed to laziness, overconfidence, and lack
of research via visiting companies. Laziness and lack of research maybe questionable. The authors measure laziness in relation to how much a fund differs from and delivers returns in line with its benchmark, while lack of research is suggested by the more attractive managers visiting companies less. It was found the more attractive managers chased more lottery type stocks and did trade more than their less attractive counterparts, which has long been recognised to be a drag on returns.

One of the more interesting things about the study was how investors seemingly reacted to a beautiful face. The more attractive fund managers pulled in more money from investors in fund flows. Something that may get back to the bias we all seemingly have towards attractive people. At least for the DIY investor who may not have a handle on what constitutes a robust investment manager, attractiveness can now be crossed off the list!

This is somewhat humorous, but the idea that some investors would allocate their money based on agreeable facial features isn’t such a stretch. The list of behavioural issues that investors encounter is continually expanding. And if an unwitting investor is faced with a combination of good looks with cocksure confidence, they’ll really be up against it.

A study in the Journal of Consumer Research in 2010, called ‘Believe Me I Have No Idea What I’m Talking About’, found as long as an information source is certain of themselves, they don’t need to have credibility to be considered persuasive. Similarly, a 2004 study in the Journal of Behavioural Decision Making found that people preferred a financial adviser who appeared extremely confident in their forecasts at expense of other, more moderate and considered advisers.

Geena Davis was an established actress in Hollywood, an Academy Award winner, not to mention an attractive former model herself, but she was completely disarmed by Brad Pitt and couldn’t concentrate on her job. What chance do the rest of us have when trying to navigate money, beauty, charisma, and confidence?

If we’re humble enough to first accept we are all prone to such behavioural follies, then we can give ourselves a little more time to make decisions with a clear head. Otherwise, pick up the phone and talk to your adviser. Looks aside, all of your advisers at Schuh Group are happy to tell it to you straight.